Real-Time Payments: Imagination Realized, Commerce Evolved

Why the move to real-time payments may happen sooner than you think.

Imagine a world in which consumers have control over their money and are connected directly to their payment mechanism of choice no matter where they are. Shoppers pay anyone directly from their current/checking accounts, banks reclaim a direct relationship with consumers, and retailers drive up store spending. Payment stakeholders drive out inefficiencies in the payments ecosystem, reducing costs and protecting margins in the face of relentless change and regulation.

Yet the complexities of our current payment systems are many. Consumers and businesses have multiple electronic options when it comes to paying for goods or services -- credit, debit, or prepaid card, ACH transaction, or alternative networks. While the current infrastructure works effectively today, it was built during an age when paper reigned and in which the mass market Internet and smartphones did not exist. Now, paper-based payment systems have fallen behind by not leveraging the limitless bandwidth, consumer protections, and ubiquitous access to online information that now enable more efficient payment alternatives.

An evolutionary alternativeReal-time payments via numerous channels and devices like smartphones, non-branded cards, mobile phones, laptops, and computers offer a welcome alternative to current payment options -- delivering instant, secure, and inexpensive payments directly between two parties anywhere in the world. While the Fed recently issued a report urging the US to adopt a real-time payment system within 10 years, industry experts are more optimistic. At the NACHA Payments conference earlier this year, ACI surveyed 120 financial industry professionals and found that 70% believe real-time ACH payments will become a reality within the next two years.

The case for real-timeThe benefits of real-time payments abound for consumers, financial institutions, retailers, and governments, and they need to be clearly and consistently communicated to all stakeholders, including consumers, to drive adoption.

For consumers, the keys to real-time payments are security and speed. Whether they’re paying each other, small businesses, large retailers, or billers, consumers control their money. As such, they appreciate benefits like lower cost, instant performance, and accompanying real-time rewards. This type of network is easy to use, so consumers can pay for charitable gifts, groceries, fuel, clothes, utility bills, association dues, and almost anything imaginable from their smartphones. Value-added paid services like P2P payments, fraud protection, and liquidity management -- as well as freebies like real-time reward offers and check replacement -- will also become widely available and utilized when real time payments are fully embraced.

Financial institutions will also reap the benefits of real-time payments, which are inexpensive, conservative, and efficient. While it’s true that financial institutions would lose money from interchange fees, conservative estimates project well over $5 billion annually in new revenue derived from consumption fees on services that consumers are demanding (e.g., P2P payments and increased fraud protection) as well as more effective cross-selling and merchant funded rewards. Further, there is an estimated $5 billion in savings from lowered attrition and saved acquisition costs.

Financial institutions also get to create new business models where they are price makers, rather than price takers, so they can start charging for the value rather than assuming an arbitrary price. Additionally, banks can become more customer-centric (and positive brand experience goes a long way).

Retailers and billers will benefit from significantly reduced costs as they are unhinged from the existing networks. Additionally, retailers will reduce their exposure to card data breaches, get more insight and control into what consumers buy, and leverage loyalty program rewards and data generated through their direct connection with consumers’ accounts. A faster receipt of funds for non-card transactions dramatically drives down time for collection, delinquencies, and operating capital costs, resulting in major savings of $6 billion globally for retailers and $5 billion for billers.

Finally, real-time payments will benefit governments by creating less payment friction and less risk from new money pools. The faster settlement of payments, particularly ACH payments, will generate a daily economic boost by freeing money tied up in the current payment networks. With more money in the system and recipients in possession of that money instantaneously, an acceleration effect can lead to increased economic velocity.

In seeking to replace the current complex card payment systems, real-time payments must gain wide adoption to create a network effect capable of propelling the new system forward. With effective communication and marketing of the advantages of real-time payments, the potential real-time payments network is poised to introduce the next step in the evolution of payments.

Paul McMeekin is a big believer in the power of payments and how electronic payments can change the world. He currently heads up the business intelligence and market research function at ACI, a large global payment software provider. Previous roles at ACI include product ... View Full Bio

A lot of planning is going to have to go into mitigating fraud risks with the move to real-time. We have an upcoming article that will tackle that issue. But the UK saw a sharp rise in fraud the during its early stages of implementation.

You make a compelling case for this, Paul. So my question is: with all these benefits and all the players seemingly agreeing there are benefits, what is the delay in implementing real-time payments on a widespread basis? Are there standards, infrastructure and/or compliance/legal issues? Cost considerations? Politics? What needs to happen to accelerate the process?